By Peter Nurse
Investing.com — The dollar clung to marginal gains in early European trade Wednesday, but volatility was limited with traders awaiting upcoming U.S. inflation data and an ECB meeting for clues about future central bank policy.
At 2:55 AM ET (0755 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, was up less than 0.1% at 90.093.
The dollar has been on a downtrend for much of the last year, but investors are starting to get nervous that rampant inflation could force the Federal Reserve to taper back its ultra easy monetary policies earlier than previously guided. This would result in rising interest rates and a more buoyant greenback.
Earlier Wednesday, China’s factory-gate prices jumped in May to their highest level since 2008 driven by surging commodity prices, increasing 9.0% year-on-year in May, a considerable leap from the 6.8% growth during the previous month.
Consumer prices also increased for the third consecutive month, rising 1.3% year-on-year in May, up from 0.9% gains during the previous month, and the Chinese yuan rose as a result, with USD/CNY falling 0.1% to 6.3953.
This sets the scene for Thursday’s release of U.S. consumer price data, one of the last major pieces of economic data before the next Fed meeting on June 15-16.
“We see clear risks of a big positive surprise to the May inflation report as well with core inflation around or just above 4%. The market is still buying the transitory inflation narrative but for how long,” said analysts at Nordea, in a note.
Thursday also sees the latest policy decision by the European Central Bank, with the central bank widely expected to keep in place its ultra-loose monetary policies given the region has yet to generate inflation at anything like the levels seen across the Atlantic.
That said, the euro is likely to be sensitive to changes in the bank’s economic forecasts or any signal that the pace of bond buying could be reduced in months ahead.
More immediately, the Bank of Canada meets later Wednesday, with its latest policy decision due at 10 AM ET (1400 GMT).
This central bank was the first from the advanced economies to point to an easing back of a very accommodative stance, when in April it accelerated the timetable for a possible interest-rate increase and pare back its bond purchases.
No major change is expected later Wednesday, but USD/CAD has dropped 0.1% to 1.2106 as the Canadian economy moves toward a full recovery.